Viabilidad de la implementación de la propuesta del Modelo Integral Estratégico en la

(a) Description

To date, this appears to be the most common structure through which Offshore Sponsors are establishing RMB Funds, and has been the structure of choice for large Offshore Sponsors such as Blackstone and Softbank. This structure involves the Offshore Sponsor setting up (directly or indirectly) a PRC subsidiary with a whole or partial foreign interest (which may be a WFOE a JV or an FIE-reinvested company) to act as the general partner of the RMB Fund. The Offshore Sponsor would also set up a wholly owned onshore management company to act as the investment adviser to the RMB Fund. Shanghai, Beijing and Tianjin have each implemented local rules which permit a foreign controlled entity to provide investment advisory services to an RMB Fund. PRC investors or offshore investors could then participate in the RMB Fund as limited partners, and the RMB Fund would invest directly in portfolio companies.

The following is a diagram illustrating the basic structure:

Service Offshore China Portfolio Co Foreign Sponsor Offshore LPs RMB FUND LLP GP Domestic LPs Offshore Advisor SPV Management Co

As described in Section 3.6(c)(ii) with respect to Shanghai, as well as Chongqing, rules have been issued that explicitly permit foreign investors to participate in an RMB Fund as QFLPs. Foreign investors would be permitted to directly invest in and fund capital contributions in a foreign currency into an RMB Fund, which can be converted into RMB for future investment in onshore entities. Although detailed rules have not yet been established regarding remittance of returns to foreign investors

participating in an RMB Fund, all indications are that these returns will be convertible back into foreign currency and remitted out of the PRC as long as the returns are in accordance with the RMB Fund documentation, as approved by the relevant regulators. This would include remittance to the general partner of its carried interest profits from the RMB Fund.

Despite potential uncertainty, it seems that an RMB Fund with an FIE general partner will be subject to the Foreign Investment Catalogue and other restrictions applicable to foreign investment in the PRC. This, therefore, removes one of the primary incentives of establishing an RMB Fund and may discourage domestic PRC investors from participating in an RMB Fund that is controlled by an FIE general partner. Although there is some evidence (as discussed below) that an investment in foreign currency by an FIE general partner (capped at 5% of the overall fund size) will not “taint” the RMB Fund, the market has been evolving in two ways to address this issue. First, fund sponsors have been raising capital for RMB Funds only from onshore PRC investors in order to avoid any tainting by foreign investors. Second, the general partner is typically not formed as a WFOE of the Offshore Sponsor. Instead, the general partner will either be formed: (i) by a local asset management partner or the investment arm of the municipality in which the RMB Fund is being established (eg, Shanghai or Beijing) or (ii) as a JV in partnership with such an entity. The onshore management company can remain a direct subsidiary of the Offshore Sponsor as that does not appear to create issues for the fund under the Foreign Investment Catalogue. The Offshore Sponsor then enters into contractual arrangements with its onshore partner in order to share in the benefits (ie, the management fee and the carried interest return) as if the Offshore Sponsor were participating in the general partner.

(b) Regulatory Approvals

In order to establish all the onshore PRC entities required for the RMB Fund (the management company and, to the extent the general partner is an FIE and/or foreign investors are admitted to the fund, the general partner and the fund partnership itself), MOFCOM and local SAIC approval will be required because these would be considered regulated FIEs. If the total investment amount is less than USD300m, then approval from only the provincial level of MOFCOM is required. If investment amounts exceed this, then central MOFCOM approval is required. Assuming that the general partner is structured as discussed in clause (a) above, and no foreign limited partners participate in the fund, then the RMB Fund should be considered a purely domestic entity and will not be subject to MOFCOM approval. Similarly, in this case, the investments of the RMB Fund itself will not be subject to the Foreign Investment Catalogue or to any other regulatory approvals that would be required by foreign investors in the PRC. However, if the general partner is an FIE there is a chance that the RMB Fund will be treated as an FIE and its downstream investment will be subject to the FIE reinvestment restrictions. There is some anecdotal evidence that suggests that if the only foreign capital in the RMB Fund comes from the FIE general partner (capped at 5% of the overall fund size), and there are no foreign limited partners in the RMB Fund, then the fund will be treated as purely domestic for purposes of making its investments onshore. However, such treatment would need to be confirmed on a case-by- case basis for each fund. In addition, the RMB Fund (and its fund manager) will be required to register with the NDRC to the extent its commitments are equal to or greater than RMB 500 million and it otherwise fits into the criteria set forth in the NDRC circular (as discussed in 3.6(b) above) and may also be required to register with local authorities as is the case in Tianjin as described in S3.6(c)(iii) above. (c) Capital Commitment

There is generally no prescribed minimum capital contribution by the partners. However, as described in Section 3.6, certain local rules may require minimum amounts. There is a general limit of 50 partners (including the general partner) for each RMB Fund. This requirement is likely not on a look-through basis and could potentially mean more investors with the use of feeder entities. (d) Scope of Investments

As discussed above, if the general partner or the limited partners in the RMB Fund are comprised of foreign entities or individuals, then the RMB Fund under this structure would generally be subject to all the investment restrictions under the Foreign Investment Catalogue. In order to avoid that, sponsors have been taking the structuring steps discussed in clause (a) above, to ensure that such restrictions will not apply, and that the fund will enjoy all the benefits of a purely domestic vehicle. Also, as discussed in clause (b) above, an RMB Fund may be treated as purely domestic if the only source of foreign

(e) Foreign Exchange risks

If the general partner is an FIE, SAFE Circular 142 imposes limitations on the convertibility foreign currency for investment purposes, but local regulations in this area often do vary. For instance, the Shanghai regulations generally permit a foreign-controlled general partner to directly contribute up to 5% of the fund’s aggregate size in foreign currency to the RMB Fund it establishes which is allowed to be converted into RMB for future investment in onshore entities. Similarly, foreign limited partners under the Shanghai regulations are also permitted to directly invest in foreign currency into the RMB Fund which is then allowed to be converted into RMB for future investment in onshore entities. Payment of interim dividends and repatriation of capital for any foreign capital invested in an RMB Fund would be subject to SAFE approval. As mentioned above, although detailed rules have not yet been established regarding remittance of returns to foreign investors participating in an RMB Fund, the expectation is that these returns (including the carried interest to the general partner) will be convertible back into foreign currencies as long as the returns are in accordance with the RMB Fund documentation, as approved by the relevant regulators. For the repatriation of the management fee from the onshore management company to the Offshore Sponsor, this could be structured as a contractual service payment thereby making it a current account item and subject to only to bank processing review, and not SAFE approval.

(f) Advantages

The approval procedures for setting up an RMB Fund should be more streamlined as the fund itself is a domestic entity (assuming there are no foreign partners) and only a record filing is required. However, MOFCOM approval is still necessary for the establishment of the general partner (if it is foreign invested) and for the management company. The real advantage, however, for Offshore Sponsors, is that if structured properly, this type of vehicle will give them access to the large PRC investor base, a domestic partner with access to deal-flow and RMB Funding and the ability to make investments in the PRC without the restrictions placed on foreign investors.